What Is Accounting Procedure?

Detailed examination of accounting procedures, which are standardized methods a company utilizes to manage its routine accounting tasks. These procedures are often documented in a manual for training purposes.

Accounting procedures are standardized methods a company utilizes to manage its routine accounting tasks. These procedures may be meticulously documented in a manual to assist new employees in learning the system. By following these standardized steps, companies ensure consistency, accuracy, and compliance with relevant regulations and standards.

Types of Accounting Procedures

General Ledger Management

This involves the recording of financial transactions, maintenance of account balances, and periodic reconciliation.

Accounts Payable

Procedures for managing the company’s obligations to creditors, including invoice processing, verification, and payment scheduling.

Accounts Receivable

Methods for handling incoming payments from customers, including invoicing, payment processing, and collection activities.

Payroll

Processes involving the calculation and distribution of employee salaries, tax withholdings, and deductions.

Inventory Management

Procedures for tracking inventory levels, orders, sales, and deliveries to ensure accurate financial reporting.

Fixed Assets

Recording and management of long-term assets, including depreciation schedules and disposal.

Tax Compliance

Compliance with tax regulations, including calculation, filing, and payment of various types of taxes.

Special Considerations

Internal Controls

Implementation of checks and balances to prevent errors and fraud. This includes segregation of duties, authorization of transactions, and periodic audits.

Compliance with Standards

Ensuring that accounting procedures align with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the regulatory requirements of the country.

Documentation and Training

Maintaining detailed manuals and conducting training sessions for new employees to familiarize them with the company’s accounting system.

Examples of Accounting Procedures

Example 1: Invoice Processing in Accounts Payable

• Receive Invoice: The company receives an invoice from a supplier.
• Verify Invoice: The invoice is checked against the purchase order and delivery receipt for accuracy.
• Authorize Payment: The authorized personnel approve the invoice for payment.
• Record Transaction: The transaction is entered into the accounting system.
• Issue Payment: Payment is issued to the supplier within the agreed terms.

Example 2: Recording Depreciation in Fixed Assets

• Identify Asset: The company identifies a newly acquired fixed asset.
• Determine Depreciation Method: The method of depreciation (e.g., straight-line) is chosen.
• Calculate Depreciation Expense: Depreciation expense is calculated based on the asset’s useful life and depreciation method.
• Record in General Ledger: The depreciation expense is recorded in the general ledger.

Historical Context

Evolution of Accounting Procedures

The development of accounting procedures dates back to ancient civilizations, where record-keeping was essential for trade and taxation. The double-entry bookkeeping system, introduced in the 15th century by Luca Pacioli, laid the foundation for modern accounting practices.

Applicability

Small to Medium Enterprises (SMEs)

Accounting procedures are crucial for SMEs to ensure efficient financial management, accurate reporting, and compliance with taxation laws.

Large Corporations

For large corporations, detailed accounting procedures are essential to manage complex financial transactions, maintain investor confidence, and comply with stringent regulatory requirements.

Comparisons

Manual vs. Automated Procedures

• Manual Procedures: Involve manual entry and verification of data, which can be time-consuming and prone to errors.
• Automated Procedures: Utilize accounting software to streamline tasks, increase efficiency, and reduce the risk of errors.

Related Terms

• Bookkeeping: The process of recording daily financial transactions in a systematic manner.
• Financial Accounting: Preparation of financial statements for external reporting purposes.
• Managerial Accounting: Internal process focused on providing information for management decision-making.
• Internal Audit: Independent assessment of internal controls and procedures to ensure effectiveness and compliance.
• External Audit: Independent examination of financial statements by external auditors.

FAQs

What are the main categories of accounting procedures?

The main categories include general ledger management, accounts payable, accounts receivable, payroll, inventory management, fixed assets, and tax compliance.

How can a company ensure compliance with accounting standards?

By continuously updating procedures to align with GAAP or IFRS, conducting regular training, and internal audits.

Why is documentation important in accounting procedures?

Documentation provides a clear guide for employees, ensures consistency in processes, and serves as proof of compliance during audits.

References

• Pacioli, Luca. Summa de arithmetica, geometria, proportioni et proportionalità, 1494.
• FASB. Accounting Standards Codification.
• IFRS Foundation. International Financial Reporting Standards.

Summary

Accounting procedures involve standardized methods that a company uses to handle routine accounting matters. These procedures are essential for ensuring accuracy, consistency, and compliance with regulatory standards. Understanding and implementing effective accounting procedures is critical for the financial health of any organization, regardless of its size.